śrī-bhagavān uvāca
yad āttha bhagavaḿs tvaḿ naḥ
karavāma priyaḿ tava
bhavato yad vyavasitaḿ
tan me sādhv anumoditam
sri-bhagavan uvaca -- the Supreme Lord said; yat -- what; attha -- have spoken; bhagavan -- O lord; tvam -- you; nah -- to Us; karavama -- We should do; priyam -- the gratifying; tava -- of you; bhavatah -- by you; yat -- what; vyavasitam -- determined; tat -- that; me -- by Me; sadhu -- well; anumoditam -- agreed with.
We should not think it strange that the Supreme Lord, Krishna, here addresses Lord Siva as bhagavan, "lord." All living beings are part and parcel of the Lord, qualitatively one with Him, and Lord Siva is an especially powerful, pure entity who possesses many of the Supreme Lord's qualities. Just as a father is happy to share his riches with a beloved son, so the Supreme Lord happily invests pure living beings with some of His potency and opulence. And just as a father proudly and happily observes the good qualities of his children, the Lord is most happy to glorify the pure living beings who are powerful in Krishna consciousness. Thus the Supreme Lord is pleased to glorify Lord Siva by addressing him as bhagavan.